International Involuntary Lending and Contingent Default Threat
Posted: 17 Oct 2006
A simple model of international debt is formulated in strategic form game, where a country in financial crisis and on the verge of default is requesting a new loan. On the other hand, a bank, with exposure to the foreign country's debt, contemplates whether it should issue the new loan. We show that "issue a new loan" and "not default," a Pareto optimum pair of strategies, is stable. Interestingly, we get this result by using a non-cooperative negotiation process, offered by "individual contingent threat situation."
Keywords: Involuntary lending, international debts, contingent threat situation
JEL Classification: F0, F3
Suggested Citation: Suggested Citation